After Hours

Anyone watching the close of the market last night will likely still be shaking off the hangover as we noted 'the most ridiculous' market movements occurred in the space of a few milliseconds. As ever, trusty investigator of all things ridiculous in equity markets, Nanex highlights a rather disturbing trend, now completed its third year, where volume compression simply breaks the market. On 11/30/11, quotes from Nasdaq suddenly stopped for about 20 seconds after another explosive close where multiple seconds worth of trading were jammed into the last second. However, trading at Nasdaq wasn't affected. This is yet another example of where direct feeds illegally give data to one group of subscribers ahead of the consolidated feed. Clearly, the NBBO was ignored. For the last 3 years (2009, 2010, and 2011), there has been unusually high trading activity in the final minutes of trading activity on the last trading day in November. We show one example stock in detail below (SPY). Human discounting of a known rebalancing event? No. Completely 'broken markets' that are driven by self-reinforcing and chaos-reverting algos? Yes.

See-sawing – and still looking for direction. Open weaker, in line with the US close. Some exuberance ahead of the Italian auction, despite negative figures. Awakening that nothing was justifying this. Re-correction while awaiting the US take of things. With the US opening flattish plus, Europe had a light lift and started tagging along, tick for tick, stuck in a loop. Some more European gloomy news to end the day. Way Down. For the moment mostly an equity move. And cut.

There have been no major overnight events or surprises, with Europe continuing a war of semantics whether the Spanish bailout is a bailout, and attempting to avoid it as long as possible while reaping the benefits of Spanish bonds which are trading at post-bailout levels for a 3rd months now, as well as whether Greece will receive more Troika money (the WSJ reported that Greece requires €30 billion through 2016 to close its funding gap: a number which will eventually double, then triple), and yet as of moments ago the EURUSD slipped under the psychological 1.2900 support, which also means that 1400 on the SPX cash is in play. Italy did not help after business confidence declined from 88.3 to 87.6 on expectations of a rise to 88.7 What news there has been is largely the realization that reality is here to stay, following misses and guides lower from Amazon and Apple, and no matter what some low-volume algo tries to represent by buying the stock in the after hours session, profitability and cash flow creation for both companies will be lower going forward. In terms of newsflow, the NYT released a report last night that China's Premier may have been hiding billions in "related-party" transactions - imagine that, and one which promptly got the NYT blocked from China's internet. Obviously this is a touchy topic for China days ahead of its internal party vote, and one which will hardly score the US brownie points with the domestic administration. Concurrently, Japan announced a new fiscal "stimulus" for a whopping ... $9.4 billion. That is roughly the amount of money needed to evade deflation for 2-3 hours. More apropos, Bild reports what Bloomberg noted earlier, namely that Merkel has no majority for reported Greek aid, further blowing up the hole that Greek finmin Stournaras dug himself in with his lies earlier this week. So while everyone is once again on edge, with the Shanghai composite sliding 1.7%, and key technical levels either breached or in play, today's session promises to be quite interesting.

After defying gravity for months on end, on what we quarter after quarter warned were ever declining margins and revenue growth, the Amazon bubble (just about 300x P/E at last check) has finally popped, and investors no longer believe that the company can offset collapsing profit margins with increasing volume. And yes, the Kindle is proving to be nothing more than yet another fad rather than the latest and greatest razor-razorblade ecosystem paradigm.

Everyone's favorite Whitney Tilson repeat-endorsed, slow motion trainwreck, NetFlix, has reported results after hours. They are, as expected, terrible with lots of cash burn, declining margins and excuses, and as a result the short squeeze is over and the stock is imploding after hours. Among the details:

Q3 Gross profit declined to 26.8% from 27.6% in Q2 and 34.7% in Q3 2011.

Total cash declined by $32 million

Free cash flow was -$20 million, despite positive "net income"

Q3 Streaming content obligations were flat at a whopping $5 billion. $2.1 billion is due in the next year. The brilliance strikes here first. These obligations "not include obligations that we cannot quantify but could be significant." Uh... What?

And while the firm forecasts a net income loss in Q4 of ($13)MM to $2MM as seen in the table below, which means a far worse free cash flow loss in Q4, the absolute pearl was the following:

At this point saying Texas Instruments guides lower is about the most habitual thing about this broken market, aside from the traditional Fed-Citadel juiced 3 pm ramp, of course. Sure enough, moments ago the analog circuits company announced results which were modestly better on the bottom and top line (following repeated earnings guidance lower), and yet which did the usual TXN thing and slashed guidance:

SEES 4Q REV. $2.83B-$3.07B, , EST. $3.22B

TI SEES 4Q EPS 23C-31C, EST. 37C

Just a tad. And, amusingly just as we predicted moments ago that in a ZIRP environment CapEx will be the first thing let go, here is TXN announcing it is slashing its full year growth spending forecast by 30%:

TI SEES YR CAPEX $0.5B, DOWN FROM PRIOR VIEW $0.7B

Of course who needs to invest in future revenue growth when the Fed has toner. The market, which is back to responding in absolute bizarro fashion is taking the latest disappointment in short squeeze stride, and has even managed to push the stock higher in the after hours session.

To summarize: European stocks are little changed although Spanish shares rise. Spain 10-yr bond yields fall to the lowest level in more than 6 months. S&P futures are now higher on the trading session, driven by correlation engines as the euro is up vs the dollar, despite major disappointments by IBM and Intel. In other news Germany formally shut down the debt redemption fund proposal, ending one more rescue avenue for when the recent baseless euphoria ends, even as Spanish La Vanguardia reports that Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms. Needless to say, Italy is said to resist the proposal: after all in Europe one just wants the upside from being bailed out, as opposed to actually being bailed out...

For those who missed it earlier, Intel reported results that were just slightly better than expected, and yet the stock tumbled over 3% after hours. The reason is because despite a weak quarter which had been pre-guided down by the sellside community every so effectively, the semiconductor manufacturer saw even more weakness in Q4. Those who wish to read the details can do so here. For everyone else who is more of a visual learning bent, we present the following chart which shows the year-over-year change in Intel revenue, which shows that for the first time in 12 quarters, INTC reported a decline in annual revenue. Furthermore, there is virtually no question that Q4 will also see a revenue decline: the only question is whether it will be greater than Q3's 5.5% Y/Y drop.

Broadly speaking, risk assets were not as dismal as equity markets today - holding on near the highs for much of the day. The late day surge higher in AAPL - that dragged everything higher - was a recoupling to risk-assets on the day as volume surged and average trade size picked up significantly. AAPL ended up at the record-high day's closing VWAP (around $672) perhaps suggesting some algo-driven liftathon to enable the bigger boys to exit the heavily-weighted-in-the-index name - and right in front of Bernanke's big day tomorrow, it seems odd - other than short-covering squeezes - to be positioning this heavily long. HYG once again soared (playing catch-up to HY credit spreads), VXX tumbled into the close as VIX dropped following the ESM decision (though was not as ebullient as stocks ahead of tomorrow's NFP). Treasuries just kept leaking higher in yield (now 5 to 30Y yields higher by 5-10bps on the weeks) - and crushing the spread to MBS. The USD was stable most of the day after early weakness, on EUR strength after the ESM decision, was unwound. A bump-and-dump in commodities ended generally unchanged aside from Silver which had its own mysterious flash-crash soon after the US day session close. Credit tracked stock generally on the day and was quiet. S&P futures take out (after-hours) the highs of the day/year/four-years (as contracts rolled). Need Moar QE.

Two weeks ago we reported that as the market's fascination with the "get poor quick" schemes known as 3x levered ETFs fades away, the time for the next logical step, the death of levered ETFs, has arrived when Direxion announced that it is closing 9 3x levered ETFs, among which the Direxion Daily Healthcare Bear 3X Shares (SICK) and Direxion Daily Agribusiness Bear 3X Shares (COWS). For those curious why everyone should be delighted that such uberlevered, gambling-enabling abortions as SICK COWS should always get the axe, here is a visual explanation from Nanex.

At last check, one of the final remnants of the second coming of the dot com bubble was trading down 15% after hours following its Q2 earnings report which while beating on the bottom line at $0.08/share (including a one time $0.04 gain) on expectations of $0.03, missed the top line forecast of $575 MM, instead reporting $568.3 MM in revenues. Also spooking the market is the company's Q3 revenue forecast of $580MM - $620MM vs estimates of $607.4 MM. Company also adds that "income from operations for the third quarter 2012 is expected to be between $15 million and $35 million, compared with a loss from operations of $0.2 million in the third quarter 2011." Considering the market cap is just shy of $5 billion one may be excused to ask just how the company will grow its net income to anything remotely resembling a rational valuation, even when taking that company's $1.2 billion cash, all of its as a result of fundraising. Finally, what would a GRPN release be without the now traditional recasting, adjusting, and otherwise proformaing of some historical core line times. Sure enough: "The second quarter 2012 marked the first time that direct revenue was material to the Company’s consolidated performance. As a result, beginning in the second quarter 2012, third party and other and direct revenue are presented separately. Third party revenue is related to the sales for which the company acts as an agent for the merchant. This revenue is recorded on a net basis. Direct revenue is related to the sale of products for which the Company is the merchant of record. These revenues are accounted for on a gross basis, with the cost of inventory recorded in cost of revenue." Uh... Ok. Have fun with that..